IC Measurement Models

"IC is about future earnings potential put into numbers and narrative." - Leif Edvinsson

Summary

1    The starting point of most IC models is a categorization of intellectual capital into different components. A popular categorization is that of human capital, structural capital and relationship capital. Intellectual property is sometimes viewed as a component of structural capital but because of its distinctive nature is often treated as a separate category.

2    Human capital is the component that has received most attention over the years. Although the notion of human capital accounting – treating people as assets rather than costs in company accounts – did not take off, there has been growing use of scorecards and similar instruments to assess human capital. Examples include the Human Capital Readiness scorecard and the Human Capital Monitor.

3    There are a growing number of comprehensive IC models. They vary in sophistication from a simple matrix, in which to develop indicators, to more rigorous methods based on a hierarchy of components. Refinements in newer models include addition of visualization tools, analysis of flows and conversion of IC, as well as its stocks and "what if" computer analyses of trade-offs.

4    Types of indicators that are commonly used are stock indicators (the level of a specific component of IC), flow and process indicators, and resultant outcomes. Process indicators may relate to business processes or processes to renew, develop and grow intellectual capital. Another type of indicator concerns risk. The types can be summarized as the 4Rs – resources, recipes, results and risk.

5    More developed methods have supporting software and guidance for use. Many start with an analysis of different stakeholders and what they value. There is a growing group of specialist consultancies offering services, usually around their proprietary methods. For users working on their own, the Danish template and guidelines are probably the most comprehensive and include supporting case studies.

6    Few IC measurement systems explicitly relate to the core concepts of knowledge management. The briefing concludes with a knowledge capital measurement framework that does so by applying the language of different manifestations of knowledge to core business processes.

If the management and exploitation of intangible assets and knowledge is a key driver of future wealth, then organizations need measurement systems that put these factors to the fore. The Nordika project summarizes it well:

"A profound change in the economy is setting a new agenda for markets, changing the nature of competition and wealth creation. This change has come about since IC has become the single most important factor in production, and this shift is affecting how companies are managed and how they operate – for instance in networks and alliances. This in turn calls for new tools for managing and reporting, focusing on IC."²⁵⁵

Karl-Erik Sveiby in comparing his IAM method (described later) to the BSC (balanced scorecard) comments:²⁵⁶

"If the notion of people as revenue creators is accepted, we have to come closer to 'the source' of their knowledge if we wish to measure it more accurately."

In his model, he puts human competence first. This is the driver of the two other elements of his IC model – internal and external structural assets – that in turn drive revenue.

Over the last few years many other IC models and methods have been developed. This briefing compares and contrasts them. As an introduction, we start by considering the different types of intellectual capital, and show how different models give them different prominence, as well as different definitions. The next section reviews some methods that specialize in the measurement of just one component of intellectual capital. This briefing covers mainly human capital. This is followed by a section on comprehensive IC measurement methods. For completeness, we cover some additional methods looking at the wider intangibles context of sustainability and governance. The briefing concludes with a comparison of the models and synthesizes a model that pulls together the best features of all the others.

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